The Treasury Secretary Scott Bessent recently hinted at providing unlimited support to help Japan rescue the yen, but some market participants believe his limited ammunition makes it hard to deliver on this promise. The yen fell as much as 1% against the U.S. dollar on Monday, erasing half of the gains triggered by the first joint U.S.-Japan intervention to prop up the yen since 1998.

After the two countries took action on July 31, the yen briefly approached 155, but it has since weakened past 159. Following the rare coordinated operation, Bessent stated, "We will support them at all costs, helping both the U.S. economy, American taxpayers, and stabilizing the global economy." However, the challenge lies in the limited funds available for currency intervention, as the primary tool, the Exchange Stabilization Fund, has less than $220 billion.

To put this in perspective, Japan alone is estimated to have used $53 billion on July 30, just before the joint action. "The U.S. can influence the narrative through coordinated intervention with Japan, but it cannot rewrite the fundamentals," said Nathan Thooft, senior portfolio manager at Manulife Investment Management. The U.S. authorities "have deep pockets, but they are not without limits."

In principle, the Federal Reserve has unlimited ammunition for currency intervention to weaken the dollar, as it can effectively print money. However, in last month's action, its role was limited to executing the Treasury's yen purchases. In the past, the Fed has sometimes used its own funds to intervene jointly with the Treasury as a show of support. For example, in 1998, the costs of intervening in the yen were split equally between the Fed and the Treasury. Similarly, their joint efforts to sell yen in 2011 and buy euros in 2000 were also roughly split 50-50.

Derek Tang, an economist at Monetary Policy Analytics, wrote in a research note on Monday that this time, media reports on the intervention suggest the Fed did not finance the U.S. operation. Whether this can be confirmed will depend on official data released later this year. He noted that the U.S. central bank's "intervention capability is theoretically limited only by its will." The Fed declined to comment on the U.S. intervention on Monday, while the Treasury has not yet responded to a request for comment.

If the yen falls below 160, pressure for another round of intervention from Japan or both countries could increase. This level was seen as a key psychological threshold earlier this year. The yen broke below that level in the summer of 2024, prompting authorities to step in.